Effect of Bank Specific Factors on the Level of Non-performing Loans Among Commercial Banks in Kenya

Abstract

Loan portfolio constitutes the largest proportion of banks’ assets and therefore when loans become non-performing, they negatively impact profitability along with overall financial activity by banks. High levels of NPLs indicate a vulnerable financial system since it influences the profitability of banks in reducing levels of interest income. Understanding the factors influencing level of NPLs assists in securing effective banking policies to boost overall bank performance. The study’s aim was establishing the effect of selected bank specific determinants of the level of NPLs among Kenyan banks. All the 42 banks in operation were the study’s population. Data was obtained from 37 of the banks giving a response rate of 88.1% which was considered adequate. The independent variables for the study were capital adequacy given by the ratio of core capital to risk weighted assets, interest rate given by annual average lending rate, profitability given by ROE, liquidity given by liquid assets to total assets on an annual basis and bank size given by natural log of total assets per year. Level of NPLs was the dependent variable given by non-performing loans to total loans ratio. Secondary data for 5 years (January 2015 to December 2019) was obtained annually. A descriptive longitudinal design together with a multiple linear regression model was employed in analyzing how the variables relate. Data analysis was performed using SPSS version 23. Findings revealed an R-square value of 0.299 which meant that 29.9 percent of variations in the level of NPLs resulted from variations in the five selected independent variables. ANOVA revealed an F statistic which was significant at 5% level since p<0.05. Hence the model was sufficient in explaining the relation between the variables. Additionally, capital adequacy exhibited a positive and statistically significant influence on the level of NPLs while profitability had a negative substantial impact on the level of NPLs. The other selected determinants (interest rate, liquidity and bank size) were found not to have a statistically significant influence. The investigation recommends the implementation of measures to enhance profitability of banks and to come up with measures that will minimize the influence of capital adequacy on the level of NPLs as these two variables have a significant influence. It was also recommended that future studies should focus on other determinants of NPLs among commercial banks in Kenya.